Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House Congressional Testimony
June 09, 1999
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 3482 words
HEADLINE:
TESTIMONY June 09, 1999 ROBERT B. CUMMING MEMBER, RISK ADJUSTOR WORK GROUP
SENATE FINANCE HEALTH CARE OVERSIGHT OF RISK ADJUSTMENT
METHODOLOGY AND OTHER IMPLEMENTATION ISSUES
BODY:
Testimony Presented By Robert B. Cumming, MAAA, FSA Member, Risk Adjustor
Work Group American Academy of Actuaries June 9, 1999 The American Academy of
Actuaries is the public policy organization for actuaries practicing in all
specialties within the United States. A major purpose of the Academy is to act
as the public information organization for the profession. The Academy is
non-partisan and assists the public policy process through the presentation of
clear and objective actuarial analysis. The Academy regularly prepares testimony
for Congress, provides information to federal elected officials, comments on
proposed federal regulations, and works closely with state officials on issues
related to insurance. The Academy also develops and upholds actuarial standards
of conduct, qualification and practice, and the Code of Professional Conduct for
all actuaries practicing in the United States. Good morning Chairman Roth and
members of the committee. My name is Bob Cumming and I am a principal with the
actuarial consulting firm of Milliman & Robertson in Minneapolis. I am
appearing today in my capacity as a representative of the Risk Adjustors Work
Group of the American Academy of Actuaries (Academy). Our work group was formed
at the request of the Health Care Financing Administration (HCFA) to complete an
actuarial review of the health status risk adjustment methodology the agency
will use starting on January 1, 2000 to pay Medicare+Choice health plans. As you
are aware, the use of a health status risk adjustment formula is required by the
Balanced Budget Act of 1997 (BBA). That law directed HCFA to report to Congress
on the proposed risk adjustment method and, further, provides for, Aan
evaluation of such method by an outside, independent actuary of the actuarial
soundness of the proposal. (BBA, Section 1853). Last fall, the Health Care
Financing Administration asked the American Academy of Actuaries to perform this
evaluation. The Academy appointed a volunteer work group consisting of health
actuaries who are either consultants to or staff members with health plans and
health insurers to review HCFA s proposal. A list of the members of the work
group is attached to my testimony. Our analysis was included as part of the
agency s report to Congress which was issued on March 1. The Academy s work was
provided pro bono, although HCFA did reimburse the members for travel expenses
associated with the meetings of the work group. HCFA s Proposal Currently, HCFA
s payment rates for Medicare+Choice plans are adjusted to reflect the risk
characteristics of the plans participants as defined by the demographic factors
of age, gender and the beneficiary s status (institutionalized or non-
institutionalized; Medicaid recipient or non-Medicaid; employed or not; disabled
or not). Beginning in the year 2000, HCFA is required by the BBA to supplement
these demographic adjustments with a health status risk adjustor. HCFA plans to
assign a risk score to each Medicare beneficiary based on diagnosis information
for that individual, taken from previous hospital inpatient stays. The risk
scores were developed using a list of Aprincipal inpatient diagnostic cost
groups (PIP- DCGs), which were developed for this purpose. The previous medical
costs for inpatient hospital stays incurred by the individual are used to
determine their expected future medical risk and, therefore, how much the
Medicare+Choice health plan in which they are enrolled should be paid. New
enrollees in Medicare will be assigned an estimated risk score based on HCFA s
analysis of existing Medicare fee-for-service (FFS) data. Conclusions The new
risk adjustment system represents a significant change for health plans,
contracting providers, and health plan members. While the Academy work group
believes the conceptual basis of the risk adjustment method proposed by HCFA is
Aactuarially sound, as we have defined it for this purpose, we have serious
concerns about the method s implementation, operation, and impact. These issues
include: Exclusions of certain risk categories from the risk adjustment
methodology, such as one-day hospital stays, which may penalize health plans
that effectively manage the delivery of health care. Lack of adequate testing of
the potential impact of the new methodology on health plans and Medicare+Choice
beneficiaries, although the phase-in will significantly soften the impact of
changes in reimbursement levels from what it might otherwise be. Administrative
feasibility of the implementation of the new system because of timing and data
collection issues. The processing of extraordinary amounts of newly collected
data and completing a series of complex calculations introduces an element of
uncertainty that cannot be anticipated until health plans and HCFA have full
opportunity to understand the implications. Use of only fee-for-service data as
the basis for the development of risk adjustment weights. There is a substantial
risk for the Medicare system if the risk adjustment methodology does not work as
intended. The negative consequences could include withdrawal of Medicare+Choice
health plans from the market, financial problems or insolvency for health plans
and the potential for a reduction in benefits provided to beneficiaries. Because
of these concerns, the work group believes HCFA s decision to implement the new
methodology under a phased-in approach is a sound one and will limit changes
from the current payment system while HCFA and the health plans assess the
impact of the new methodology. While HCFA has done much work in a short time
period to develop the new methodology and design implementation strategies,
additional work remains to fully define HCFA s risk adjustment method and test
application of the method to make sure it achieves the intended results. The
work group recommends that HCFA further modify the risk adjustment model with
the knowledge gained during the first year of operation. Definition of Actuarial
Soundness The Academy was asked by HCFA to evaluate the actuarial soundness of
its proposal. For this purpose, there is no widely recognized definition of
Aactuarial soundness. The work group therefore analyzed HCFA s proposal in terms
of: (1) established actuarial criteria for risk adjustment, (2) Actuarial
Standards of Practice, and (3) the general principles and practices of actuarial
science. Actuarial Standards of Practice are guidelines developed by the
Actuarial Standards Board to help actuaries in their work. Specific actuarial
goals and criteria for risk adjustment are described in the Academy s May 1993
monograph titled, A Health Risk Assessment and Health Risk Adjustment: Crucial
Elements in Effective Health Care Reform. The criteria used to evaluate risk
adjustment systems are: Accuracy: Because payments to health plans will be
determined based on the risk adjustment mechanism, accuracy and avoidance of
statistical bias is critical. Practicality and Reasonable Cost: The risk
adjustment mechanism should not be so complex that implementation is extremely
cumbersome, thereby adding significant cost to the system. Timeliness and
Predictability: Carriers setting premium rates should be able to predict the
impact of risk adjustment on their premiums with a fair degree of accuracy and
in a timely manner, in order to avoid solvency concerns and disruption to
members. Resistance to Manipulation: The risk adjustment mechanism should aim to
make it impossible for specific carriers to benefit financially by Agaming the
mechanism. The Academy s review took into account all aspects of the proposed
methodologies that impact on its A actuarial soundness, including, but not
limited to the proposed formulas, the availability, quality, and relevance of
the data required, and the ability to be implemented as intended. In addition,
the Academy has evaluated the appropriateness of the proposed methods in
relation to available alternatives (including non-administrative data models
such as surveys, enhanced age/gender/status, and the status quo) and in light of
the modifications being made to the underlying base rates by county over the
same time period. Limitations of the Work Group s Analysis It is important to
note that the work group s analysis and conclusions relied on the information
supplied by HCFA. During the review process, HCFA provided the work group with
preliminary results of the potential payment impact of the risk adjustment
methodology on Medicare+Choice plans. However, the work group was not able to
verify the accuracy of the data collected by HCFA or the calculations used by
HCFA to determine the impact on health plans. In addition, HCFA did not provide
the work group with an assessment of the impact of the risk adjustment
methodology on beneficiaries, and the scope of our opinion is similarly limited.
HCFA s risk adjusted payment system is still a Awork in progress, and it should
be understood that our opinion on the actuarial soundness of HCFA s proposals
are based on the system as they were described to us at the time we performed
our review. The work group was not able to undertake a detailed analysis of the
mathematical formulas used to develop the risk adjustment methodology, but
rather focused its review on the conceptual and theoretical basis of the system.
Because HCFA is still working on the proposed methodology and there are a number
of unresolved implementation issues, our report is a qualified review of the
actuarial soundness of the proposal. Analysis and Recommendations The new
methodology for making health status risk adjustments to Medicare payments
appears to meet the requirements of the Balanced Budget Act of 1997, provided
the system is implemented carefully. On balance, and with a phase-in, the
proposed risk adjustment method appears to be a reasonable first step in what
should be a long-term evolutionary process. HCFA is to be commended for the
progress to date and for recognizing the limitations of the proposal arising
from the available data, timing requirements and areas for future improvements.
In general, the work group believes the PIP-DCG risk assessment methodology
developed by HCFA meets the goals of risk assessment I outlined earlier in my
testimony. However, there are a number of concerns about the health risk
assessment formula that the work group raised in its report: Using Only
Inpatient Data: A significant component of the PIP-DCG model is the restriction
of the risk adjustment method to conditions identified by inpatient hospital
claims. This feature has both advantages and disadvantages. As one positive
factor, this requirement matches well with the information currently available
to the Medicare program. Currently, hospital claim information is more
accessible and easier to audit than ambulatory care data, and requires less
additional work by health plans to report to HCFA. However, there are several
drawbacks to a system that uses only inpatient data. A major feature of managed
care has been the measurable shifting of inpatient care to outpatient sites and
the substitution of less invasive therapies to treat a given condition. When the
risk assessment system is restricted to inpatient claims, the members subject to
effective managed care can appear healthier than average, because of limits on
what is measured. If outpatient (ambulatory) data is added to the inpatient
claims information, a better picture of the potential Arisk of each individual
Medicare beneficiary is obtained. We have therefore recommended that outpatient
data be included in HCFA s methodology as soon as it is feasible to do so.
Exclusion of One-Day Hospital Stays: The risk adjustment methodology does not
Agive credit for one-day hospitalizations, under the assumption that including
them may result in Agaming of the system by health plans. If included, plans
could Agame the system by ordering unnecessary one-day stays for minor medical
conditions, in order to include beneficiaries in the health status risk
adjustment process, and thereby increase payments the next year. The underlying
concept of excluding one-day admissions does have merit. It can reduce gaming of
the system by requiring each hospitalization to be of a certain severity
(measured by a length of two days or more) and plans would not have an incentive
to hospitalize a patient overnight just to receive Acredit. However, the
exclusion of one-day stays may unduly penalize plans which efficiently manage
the delivery of health care. This is because effective care management tend to
reduce stays to one day which might otherwise be two or more day stays. Since
those stays would then be excluded from the risk adjustment process, this would
penalize plans for their efficiency. According to the report from Health
Economics Research (HER), which assisted HCFA in designing the PIP-DCGs,
excluding one-day stays reduces the predictive power of the health status risk
adjustment methodology. Also, it might be noted that excluding one-day
hospitalizations shifts the issue of Agaming from whether to hospitalize someone
at all to a question of whether to keep the patient for a second hospital day.
The work group suspects that the disadvantages of excluding one- day
hospitalizations may outweigh any possible gain. It would be appropriate to
analyze the risk adjustment methodology based on whether it is easier to Agame
admissions or to Agame length of stay and any resulting adverse incentives for
health plans. HCFA may want to consider either using one-day stays as part of
the risk adjustment formula or giving a partial credit or other adjustments for
those hospitalizations in structuring payments to health plans. Principal
Diagnosis: The PIP-DCG model measures conditions by capturing the principal
diagnosis recorded on each inpatient claim. The use of the principal diagnosis
for the PIP-DCG model is based on existing coding practices for inpatient claims
used by hospitals. Since only the principal diagnosis is generally used, it is
possible that not all appropriate information is collected or used. A qualifying
condition could be listed as the secondary (or other) diagnosis, which could be
a contributing factor leading to the need for hospitalization. Alternately,
there is a common belief that many secondary conditions currently reported are
not as reliable and should not be included in the measurement system. Since the
initial stages of the risk assessment system will be using data that was
recorded without the presence of direct coding incentives, it may be reasonable
to use only principal diagnosis information. However, as the PIP-DCG system is
implemented, the restriction to using only principal diagnostic groups should be
re-evaluated. Number and Development of the PIP-DCG Groups: Health Economics
Research developed the diagnostic groups using a HCFA survey of Medicare FFS
data which sampled 5% of Medicare beneficiaries. The claims information for this
sample fell in the two-year interval from January 1, 1995 through December 31,
1996. Beneficiaries who were not alive and enrolled in Medicare for the entire
time period were excluded, as were individuals who would not have been eligible
for the Medicare+Choice program for various reasons. Because of these limits,
the actual sample represents roughly a 3.5% sample. We have included some
technical recommendations in our report, which can be included as HCFA revises
the methodology. Excluding Discretionary Conditions: The base cost group (those
individuals who are not assigned health status risk scores) also includes
Medicare beneficiaries with diagnoses that were determined by HER to be
discretionary, vague, or only occasionally resulted in inpatient admissions. The
exclusion of those Adiscretionary conditions has the beneficial effect of
reducing potential bias in the formula against Medicare+Choice health plans with
well managed care delivery systems by not giving credit for discretionary
admissions and by removing the incentives to hospitalize a patient for minor
illness. However, we suggest that the diagnoses included in the base cost group
should be reviewed in the future as coding practices change under the PIP-DCG
system. If hospitals become more aggressive in their coding in the future, the
percentage of claims falling into a PIP-DCG may change and weights would need to
be recalibrated, particularly if the PIP-DCG method is used beyond the currently
planned three-year period. Chemotherapy: HCFA has indicated that beneficiaries
who are undergoing chemotherapy will be placed in a diagnosis category based on
the patient s secondary diagnosis (most likely cancer). Since the medical
conditions underlying the need for chemotherapy represent high-cost, ongoing
conditions that are predictive of future medical expenses, it is appropriate
that they be included in the risk assessment model. The work group believes
including chemotherapy as part of the diagnosis groups will increase the ability
of the methodology to predict future health care costs. Exclusion of Indirect
Medical Education Costs: The model developed by HER excludes indirect medical
education (IME) costs from the Medicare FFS data used to calculate the relative
weights used in this system. The IME costs are approximately two-thirds of the
total graduate medical education costs currently paid through
Medicare (the FFS data does include direct medical education
expenses). While it is technically incorrect to include any graduate
medical education costs (since medical education costs
will be paid outside of the capitation rate in the future), any distortion is
likely to be small. However, it is possible there will be some internal
inconsistencies in the model since high-cost conditions captured in the PIP-DCGs
may more likely be treated in a tertiary care or teaching hospital. Factors for
Newly Enrolled Medicare Members: HCFA decided to develop a special set of risk
scores for those individuals who are eligible for Medicare for the first time
and do not have any previous encounter data in the Medicare system. HCFA used
FFS data to construct average expenditures for categories of newly eligible
members (beneficiaries who become eligible for Medicare because of age or
disability, or members who were previously eligible for coverage but deferred
entry into the Medicare system). Newly eligible members will be assigned an
estimated risk score based on HCFA s estimate of their predicted medical
expenditures. The validity of these risk scores is unclear. The work group
suggested that HCFA review its risk scores for the newly eligible once current
data is available. Additional Testing: Health Economics Research performed a
number of tests on the PIP-DCG risk adjuster methodology to determine how
accurately it predicts total expected medical costs. The recommendations made by
HER regarding several key components of the model such as the use of inpatient
data only, exclusion of one-day stays and the number of PIP-DCG groups to be
used, appear to be reasonable based on the FFS data which was reviewed. While
the HER report discusses potential bias against managed care organizations that
deliver care more efficiently than fee for service providers, HER did not have
managed care data to determine what, if any, bias exists. HCFA has completed
some preliminary testing of the potential impact of the new risk adjustment
methodology on Medicare+Choice plans, including managed care organizations. In
order to understand the impact of the new system on the marketplace, the work
group suggests that HCFA update these tests as additional data is available, and
as health plans gain more experience with the operation of the risk adjustment
mechanism. Cost-Benefit Analysis: The proposed system is relatively new and it
is likely that there will be difficulties in implementation. It would be very
helpful to establish more accurate estimates of the cost of implementing the
PIP-DCG methodology and any modifications (such as using ambulatory data) and to
determine the benefits to be derived from these systems before final decisions
as to implementation are made. We suggest that consideration be given to
producing a cost-benefit analysis of the PIP-DCG methodology and any subsequent
modifications. The analysis should specifically include the costs incurred by
health plans due to changes to the system. Actuarial Oversight: HCFA apparently
plans to conduct additional analysis of the impact of the PIP-DCG methodology on
managed care plans. It is unclear what form that impact analysis will take. In
addition, there is a need for continuing monitoring and testing of the system
and future modifications. The work group suggests that additional actuarial
review be included as the system and subsequent changes are implemented.
LOAD-DATE: June 9, 1999